Question

Simone Smith, trading as Scents of Jamaica, Is applying for a small-business loan. She provides the bank with the following information, cash in checking account. $5,000 short-term investments, $10.350; real estate with market value of $115,500: Inventory $30.000; fiest mortgage on real estate. $25,000 home equity loan limit, $70.000; balance on home equity loan $10.000 value of home $200.00.: automobile with market value of $19.000, automobile loan outstanding. $15.000 credit card debt. $1.500.

Required
(a) Using the information provided, construct a statement of affairs (personal balance sheet for Simone Smith. trading as Scents or Jamaica. The statement should be arranged to show the assets and liabilities in their various categories eg current assets being a category.
(b) The bank's policy says that a debt ratio of 20% or less bacceptable for small business loans. Using the debt ratio as the sole criterion would you make a loon of $100.000 to Scents of Jamaica Show all working to support your answer.
(c) When firms enter into loan agreements with the banks it is very common to have covenants that place restrictions on the minimum current ratio of the firm. Consider the situation of Lyle's Autoparts. The firm has $1.807 626 in current assets and 51 364.994 in Current lovers the firm was to expand its investment in inventory and finance the expansion by increasing accounts payable how much could they increase their inventory by without reducing the current ratio below 1.2 times

Answer 1

To construct Simone Smith's personal balance sheet, one must list her current and long-term assets and liabilities. To ascertain her eligibility for a loan based on debt ratio, divide total liabilities by total assets and compare to the bank's threshold.

Step-by-step explanation:

The student has asked us to do the following: (a) prepare a statement of affairs for Simone Smith trading as Scents of Jamaica, and (b) calculate whether Scents of Jamaica is eligible for a loan based on the debt ratio criterion specified by the bank, and (c) for Lyle's Autoparts, determine how much they can increase inventory by without reducing the current ratio below 1.2 times, assuming the expansion is financed by increasing accounts payable.

Here is how you would handle part (a) and (b):
Statement of Affairs for Simone Smith:
Assets:
Current Assets: Cash in checking account - $5,000; Short-term investments - $10,350; Inventory - $30,000
Long-term Assets: Real estate - $115,500; Automobile - $19,000; Home Value - $200,000
Liabilities:
Current Liabilities: Credit card debt - $1,500
Long-term Liabilities: First Mortgage - $25,000; Home equity loan - $10,000; Automobile loan - $15,000
Equity: (Calculated as Total Assets minus Total Liabilities)

For part (b), Debt Ratio = Total Liabilities / Total Assets. If this ratio is 20% or less, Scents of Jamaica qualifies for the loan. To calculate the current ratio for Lyle's Autoparts, divide current assets by current liabilities, and make sure this ratio does not fall below 1.2 even after the inventory expansion financed by an increase in accounts payable.